What exactly happens when someone injects malicious binary code into an image file (on Windows)? How is that done?
Much more common than a buffer-overflow type bug that @Zian mentions (though I think there was a WMF vuln of this sort in Windows as recently as 4-5 years ago), is something like GIFAR (also search on SO):
a file that is both a valid image file (e.g. GIF), and a valid ZIP file (e.g. JAR (compiled java bytecode)).
This is possible because of the way these formats store their headers: specifically, they are not mutually exclusive.
So you can have a file that passes all validity checks you do, and yet when it is displayed in the browser the java code is executed (because, well, you just downloaded a valid JAR file, dincha?)
To the best of my knowledge, this has been fixed by the major vendors, but I admit I'm not really up to date.
(The original discoverer of GIFAR can be found here.)
I assume when you say "image" you mean something like a JPEG or a GIF.
The answer is that older software has bugs such that when they display the image, they can get confused. For example, images have comment fields inside them that are usually not displayed, but can contain things like the GPS coordinates of the iPhone camera that took the picture. Typical software expect that these comments will never exceed 100 characters, but a hacker can do something ridiculous like making a 10,000 character comment. Software should safely reject this, but some don't, they have a bug where these unexpected characters overflow into other areas of memory. If the hacker crafts those 10,000 bytes just right, he can cause the buggy software to run code.
Just because we humans expect those comments to be short, English text, doesn't stop the hacker from putting in long, executable code into those fields.
There are a lot of different pieces of code that might have such bugs, from MSPaint, to Internet Explorer, to Microsoft Word. They all use different code to do the same thing, and they all have different bugs. That's why you should keep your software up-to-date, so that when new bugs are discovered, these corrupted images won't affect you.
From comments to question I understood that one might be interested to get into details of executable images (oops, "image" collides with a copy of a disk, let say, pictures that are excutable/runnable scripts or programs) which look to humans as images (pictures) and to computer as executable scripts (programs):
- Video DefCon 15 - T312 - The Executable Image Exploit
- The text to above video as pdf slides
- PHP script: Check (validate) if the Uploaded File is an Image